When dense understories of remote rainforest are ripped apart for palm oil, life rafts are created for viruses to leave their natural quarantine and jump to a new abundant host. Rain forests have been eaten away by plantations for palm oil used in crackers, pizza dough, ice cream and lipstick. During the pre-palm oil boom of the 1980s, the planet was veiled in virgin rain forest. Today, the novel coronavirus is generating dramatic consequences for lives and livelihoods.
COVID-19 has thrust viable businesses and those with immense potential into distress. The welfare implications are weighty. One measure to limit the economic fall-out is to contain the large numbers of business and personal insolvencies that are expected to eventuate. Many countries have already made adjustments to their insolvency laws.
Governments, financial regulators and international organizations are responding to COVID-19 with a bundle of legal, commercial and fiscal measures. Germany, Spain, India, Singapore, Colombia, Portugal, Czech Republic, Russia, New Zealand, the United Kingdom, and the United States, have already implemented or proposed temporary changes to their insolvency frameworks.
Australia has introduced the Coronavirus Economic Response Package Omnibus Act 2020 which amends Australia’s two insolvency laws- the Bankruptcy Act 1966 and the Corporations Act 2001. The Omnibus Act amends the Bankruptcy Act to increase the threshold from A$5,000 to A$20,000 both for a bankruptcy notice being issued against a debtor, and for a creditor’s petition being presented to the court. Additionally, the time for a debtor to comply has been lengthened to six months. The amendments also allow for a stay period, that a debtor can obtain against creditor recovery action through a ‘declaration of intention to present a debtor’s petition’, to be increased.
Amendments to the Corporations Act increase the minimum debt threshold to commence liquidation proceedings by way of a ‘winding up demand,’ and the time required for a company to respond to a demand. One controversial change is to, in effect, ‘suspend’ the laws imposing liability on directors for insolvent trading under the Corporations Act by way of a new section that provides for – ‘Safe harbour’ or ‘temporary relief in response to the coronavirus.’ Holding company liability is similarly suspended. It follows that insolvency law should look at the survival of organizations, as well as their orderly liquidation.
The role of insolvency law lies principally in reinforcing commercial morality and encouraging debt settlement. Once, the single objective of insolvency law was to maximize the collective return to creditors. Insolvency law was best seen as a ‘collectivized debt collection device’ and as a response to the ‘common pool’ problem created when diverse ‘co-owners’ assert rights against a common pool of assets. This incredulous creditor maximization approach bypasses the legitimate interests of many who are not defined as contract creditors such as suppliers, employees, their dependants and the community.
Contemporary revisions embrace Rawls’ difference principle mandating that persons in the worst-off positions in the context of financial distress should be protected over those occupying better–off positions. Persons in worse-off positions would be those relatively powerless to promote their aims, yet with the most to lose on the frustration of those aims. To see insolvency as in essence the sale of assets for creditors, fails both to treat insolvency as a problem of business failure, and second to place value on assisting firms to stay in business.
Thus, it has been argued that to explain why the law might give companies breathing space or re-organize them in order to preserve jobs requires appreciation of non-economic values, such as moral, political, social and personal considerations in addition to purely economic ones. Insolvency must attempt to achieve such ends as distributing the consequences of financial failure amongst a wide range of actors; establishing priorities among creditors; protecting the interests of future claimants; offering opportunities for continuation, reorganization, rehabilitation; providing time for adjustments; serving the interests of those who are not technically creditors but who have an interest in the continuation of the business (employees with scant prospects of re-employment, customers, suppliers, neighbouring property owners and tax authorities whose prospective entitlements may be diminished); protecting the investing public, jobs, the public and community interest.
A troubled company can be seen not purely as a lost cause but as an organic enterprise with a degree of residual capability. Unlike mere property, a small business, whether in or out of bankruptcy, has potential. Rehabilitation of the firm is a legitimate factor to take on board in insolvency decision-making. Insolvency does and should recognize the interests of parties who lack formal legal rights in the pre-insolvency scenario, not least because those with formal legal rights never bear the complete costs of business failure.
Creditors suffer but others with no legal rights may also be prejudiced. It is insolvency law’s application to the turbulence of a pandemic, as distinct from the calm waters of pre-insolvency contracts, that justify the intrusion of a number of value judgements concerning relative priorities of various liabilities and the order in which groups of liabilities should be discharged. In the end, these measures can only serve to flatten the insolvency curve.
